UBS Global Asset Management: Will It Be Smooth Sailing Ahead, or is
This the Calm before the Storm?

Overly complacent markets could lead to an unexpected increase in
volatility

July 18, 2014 10:00 AM Eastern Daylight Time

CHICAGO--(BUSINESS WIRE)--THE UBS GLOBAL ASSET MANAGEMENT Cyclical Market Forum, held quarterly to
discuss three plausible economic scenarios and their potential
implication for investments over the next 12 months, found its 2Q14
Forum dominated by discussions over continued strong market returns and
low volatility levels across many asset classes, as well as concerns
that potential negative shocks to the global economy have not been fully
priced into the markets. Curt Custard, the chair of the Forum, said,
"The marketplace seems more consensus-oriented than I've seen in a long
time. A policy misstep from the central banks or a rise in geopolitical
tension could rattle the currently benign environment."

Three market scenarios are proposed at each Cyclical Market Forum and
are debated by UBS Global Asset Management investment teams across a
wide variety of asset classes, including equities, fixed income,
multi-asset portfolios, hedge funds, currencies, commodities and real
estate. As of March 31, 2014, UBS Global Asset Management had
approximately USD 674 billion in assets under management globally.

UBS Cyclical Market Forum 2Q14 Economic Scenarios Under Consideration

Scenario 1 – "Carry on regardless" – In this
consensus scenario, the global environment of subdued growth and low
inflation continues. US growth continues to be mostly supported by
consumer spending, while investment growth continues to disappoint.
The European Central Bank's (ECB) new measures are not a quick fix for
the eurozone's recovery, leading to modest GDP growth. Despite the
occasional surge in geopolitical tension and some uncertainty within
China's shadow banking sector, emerging markets continue their gradual
rebalancing, which is supported by a relatively accommodative global
monetary policy stance.

Scenario 2 – "Carry on cruising" – In this bullish
scenario, global recovery is led by strong growth in the developed
markets. As business confidence remains strong and monetary policy
stays accommodative, investment spending becomes the main driver of
recovery within the developed markets. Upside surprises from both
inflation and growth will significantly increase export demand from
developed markets, which will benefit emerging economies. Despite a
normalization of monetary policy in the US, capital outflows from
emerging markets are still limited, as domestic growth, supported by
stronger external demand from developed markets, remains robust.

Scenario 3 – "Carried out" – In this bearish
scenario, the expectation of stronger growth in developed markets
never materializes. In the US, rising inflation and falling
unemployment—driven primarily by lower labor market participation
rates—signals to the market and the US Federal Reserve (Fed) that
potential growth is much lower than pre-crisis levels. In the
eurozone, the ECB's new measures prove insufficient to stimulate
growth. China continues to deal with shadow banking problems, and
other emerging markets are hit by lower external demand and reduced
risk appetite.

A majority of the Cyclical Market Forum participants voted Scenario 1 as
the most likely, the bullish Scenario 2 as the second-most likely and
the bearish Scenario 3 as the least-likely outcome. In terms of asset
class expectations, a clear majority of participants expected developed
markets to outperform emerging markets in equities and currencies, while
emerging markets debt was expected to outperform developed market bonds.
The participants agreed that the outcomes for most asset classes will
likely be significantly impacted by the actions of major central banks.
In particular, attention was focused on the following aspects: 1)
whether the ECB will increase its monetary easing policies or continue
to rely on the Fed's policies to support the global recovery, 2) whether
the Bank of Japan (BoJ) will tighten its monetary policies, or continue
with economic stimulus as it has done under "Abenomics" and 3) whether
the Bank of England (BoE) will adopt tightening measures to slow the
economy, or risk building up a bubble, particularly in the housing
market. While the market has priced in some of these actions, a surprise
may throw off the markets and could lead to unexpected volatility.

"A change in monetary policy that surprises markets would likely affect
correlations. I'm not sure whether bonds and stocks would be negatively
correlated with one another, which would impact multi-asset portfolios.
Tensions in Ukraine and a sectarian war in the Middle East have been
largely ignored, as volatility has been trading at pre-crisis levels,
despite some significant geopolitical uncertainty."

Joshua McCallum, Senior Economist, Fixed Income (London)

"The primary driver of risks to asset prices remains monetary policy.
Growth and inflation are also factors, but only insofar as they
themselves influence monetary policy. We do not yet seem out of the
clutches of central banks, the factors that determine their reactions
and the mistakes they may make."

"Exports are more than 30% of the eurozone’s GDP. Unless the upcoming
measures from the ECB are able to weaken the euro, I think it will be
difficult for European companies to unlock their potential. For example,
measures such as asset-backed securities (ABS) purchases could support
lending and weaken the exchange rate, thus helping European equities in
two ways."

Comments on Specific Asset Classes:

Tom Digenan, Head of US Equities (Chicago)

"In our view, monetary policy will act as both a support system and a
limiter for US equity levels. If there is stronger-than-expected
economic growth, the Fed will likely tighten monetary policy sooner,
resulting in a less-supportive environment for equities despite a more
favorable economic backdrop. At the same time, weaker economic growth
may lead to more accommodative monetary policies, which would likely
support equity markets, even in a lower-growth environment. Therefore,
we see moderate equity growth under all of the scenarios. Given
everything the Fed has communicated, a lower-for-longer scenario should
not be surprising."

Uta Fehm, Portfolio Manager, Emerging Markets Debt (Frankfurt)

"Over the past several months, emerging markets debt has delivered
relatively strong performance without any visible fundamental
improvement from emerging economies. We believe that the stronger
performance was driven primarily by a search for yield, especially as
liquidity has remained adequate for this asset class. However, emerging
market countries are diverging from each other, and viewing them as a
homogenous asset class is becoming less useful."

"There are two key themes driving currency investing right now. First,
the search for carry has been a major driver to returns this year, since
the carry trade has provided strong performance so far in 2014.
Secondly, central bank divergence is likely to become increasingly
important as the market focuses more on the prospect of G4 central banks
quitting their ultra-easy monetary policies at different times."

About UBS Global Asset Management

UBS Global Asset Management is a large-scale asset manager with
well-diversified businesses across regions, capabilities and
distribution channels. It offers investment capabilities and investment
styles across all major traditional and alternative asset classes. These
include equity, fixed income, currency, hedge fund, real estate,
infrastructure and private equity investment capabilities that can also
be combined into multi-asset strategies. The Fund Services unit provides
professional services, including legal fund set-up, accounting and
reporting for traditional investment funds and alternative funds.

Invested assets worldwide totaled some CHF 596 billion (EUR 489 billion,
GBP 404 billion, USD 674 billion) at 31 March 2014. The firm is a
leading fund house in Europe, the largest mutual fund manager in
Switzerland and one of the largest fund of hedge funds and real estate
investment managers in the world.

With around 3,800 employees, located in 24 countries, we are a truly
global firm. Our principal offices are in London, Chicago, Frankfurt,
Hartford, Hong Kong, New York, Paris, Singapore, Sydney, Tokyo and
Zurich.

The information and opinions contained herein are a reflection of UBS
Global Asset Management’s best judgment based on current market
assumptions and are considered forward-looking statements. Any
obligation to update or alter forward-looking statement as a result of
new information, future events, or otherwise is disclaimed. There is no
assurance that these projections will ultimately be realized. Actual
future results may prove to be different from expectations.

About UBS

UBS draws on its 150-year heritage to serve private, institutional and
corporate clients worldwide, as well as retail clients in Switzerland.
Its business strategy is centered on its pre-eminent global wealth
management businesses and its leading universal bank in Switzerland.
Together with a client-focused Investment Bank and a strong,
well-diversified Global Asset Management business, UBS will expand its
premier wealth management franchise and drive further growth across the
Group.

UBS is present in all major financial centers worldwide. It has offices
in more than 50 countries, with about 35% of its employees working in
the Americas, 36% in Switzerland, 17% in the rest of Europe, the Middle
East and Africa and 12% in Asia Pacific. UBS employs about 60,000 people
around the world. Its shares are listed on the SIX Swiss Exchange and
the New York Stock Exchange (NYSE).

About the Cyclical Market Forum

Assessing the economic and market environment is a key part of UBS
Global Asset Management’s investment strategy-setting process across all
investment areas. Our Cyclical Market Forum, open to representatives of
all investment teams, regularly debates important economic and market
themes and their potential impact on our investment strategies. The
Forum’s purpose is to examine the main economic and market drivers –
typically through scenario analysis over a 12- to 18-month time horizon
– and to foster debate between the teams managing different asset
classes. The three economic scenarios discussed should not be considered
forecasts.

The way in which the output from the Forum is used varies across UBS
Global Asset Management’s investment teams and it is just one of a
number of inputs into each team’s investment process. One of the key
benefits of the Cyclical Market Forum is the opportunity to exchange
research and viewpoints from the various investment specialists and to
examine the intersection between top-down and bottom-up drivers. As
such, it broadens the input into our strategy-setting process in a
structured format.